NY futures rebounded this week, as July gained 95 points to close at 78.91 cents.

The market regained what it had lost during the previous week and it continues to “flag” sideways. July has now settled the last 14 sessions in a tight range of just 140 points, between 77.96 and 79.36 cents. While the market may appear dull and boring at this juncture, we believe that this may be just the calm before the storm.

We say this because July open interest keeps getting bigger as it measured 141,467 contracts or 14.15 million bales as of this morning, which is the highest ever for this date. With the US crop nearly sold out, it boggles our mind that traders keep adding to their already massive short position!

The latest CFTC report confirmed that it was new spec and index fund buying and trade shorting that boosted open interest. As of April 25 the net spec long position increased by 0.88 million to 9.8 million bales, while index traders expanded their net long by 0.36 million to 6.6 million bales. On the other side of the ledger the trade net short position increased by 1.25 million to 16.4 million bales. Since open interest has been rising we assume that these positions have grown even bigger by now.

Mills have made no progress in fixing their July commitments, as there were still 4.54 million bales open as of last Friday, which was down just 35,000 bales from the week before. With the market having trended higher this week, we doubt that there were many fixations executed since then. Total unfixed on-call sales increased by 0.25 million bales to 10.9 million bales.

US export sales continue to surprise positively as last week another 251,200 running bales of Upland and Pima cotton were sold to 18 different markets. Shipments remained strong as well with 375,400 running bales to 23 destinations.

Total commitments for the current season are now at 14.4 million statistical bales, of which 10.55 million bales have so far been exported. Sales for shipment August onwards stood at 2.4 million statistical bales and many of these bales will be shipped from existing inventories during the third quarter.

US exports are headed for their second best season ever! Only the 17.67 million bales of 2005/06 are out of reach, but the 14.44 million of 2004/05 and the 14.38 million of 2010/11 might get surpassed if shipments were to average around 280,000 running bales until the end of the season.

US shippers keep pushing sales since they don’t want to hold any inventory in this negative carry environment. The goal is to be sold out as quickly as possible and this keeps driving these good sales numbers we are seeing week after week. Since cash prices seem to have topped out in many overseas markets, some of the remaining cotton could end up on the certified stock if it ended up being the highest bidder.

This makes the market difficult to predict! The fact that the US will basically sell out in a few weeks from now is bullish as such, but we may also end up with a chunk of overpriced certified stock that no one wants, which is bearish. It all comes down to timing! Before we even deal with potential July deliveries to the board, almost all of this massive open interest will have to get squared away.

For now both the specs and the trade are holding on to their respective positions and are even increasing them. By doing nothing the trade hopes to kill momentum and tire out the chart, which could prompt the specs to cash in. This strategy has worked with the March and May contracts, which have seen the market sell off to 73-74 cents late in the period. July is a bit different though, because specs could simply stay in the game by rolling to December and pick up 400 points in the process, while kicking the can down the road is no longer an option for the trade.

The US Ag belt has received a lot of rain so far this spring and in some cases it may cause some delays in planting. However, this moisture is definitely beneficial for crops and sets the stage for another good growing season. The U.S. Drought Monitor recorded its lowest reading in the 17-year history of the weekly publication, with just 6.1% of the lower 48 states currently experiencing dry conditions. The five-year drought in California is practically over, with only 8% of the state currently in drought. With El Niño conditions to prevail until the end of the year, the odds are good that the cotton belt will receive plenty of moisture.

So where do we go from here? The specs and the trade are in a game of chicken and it remains to be seen who ultimately has the stronger nerves. If speculators were to give up and let trade shorts out, then the July contract would probably remain in the mid-to-high 70s. At this point speculators have no reason to abandon their position based on what the chart tells them, but that could of course change.

The risk is that trade shorts become nervous and start to pay up, which could force values to new highs and trigger a short-covering rally. It is difficult to predict what will happen over the next six weeks, but feel that the downside risk is limited to around 200-300 points from, while upside exposure is a multiple of that.

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